Pacesetters: alliances, JVs and minority stakes drive fast-growth

A survey of 400 of western Europe's fastest growing businesses in the advanced manufacturing and technology, financial services, energy and infrastructure sectors found that 40% of the companies had identified alliances and joint ventures in their top three most important drivers of growth over the last three years.

According to the study, 38% of the companies attributed their growth over the last three years to mergers and acquisitions (M&A), compared with 62% of the businesses that said their growth had come organically and from non-M&A activities.

Edward Stead, a specialist in private equity at Pinsent Masons, the law firm behind Out-Law.com, said: "This trend towards collaboration through alliances and joint ventures reflects an increasing focus on partnership rather than control. These are partnership capital deals conducted on a grown-up basis where both sides are looking to work together, rather than the acquirer taking control. The varied deal structures being adopted reflect the need to move quickly to gain market advantage while taking a commercial approach to risk."

The results of the study, conducted for Pinsent Masons by MergerMarket, were detailed in a new report entitled 'Pacesetters: How Europe’s fastest-growing companies stay ahead of the pack' 

Collaboration, innovation and being a purpose-led business are three factors that have allowed the fastest growing companies to succeed, the study found. 

John Tyerman, a corporate law expert at Pinsent Masons, said: "Europe’s fastest-growing companies drive job creation, generate additional tax revenue and provide new opportunities for a broad range of stakeholders. Despite playing this vital role, we know comparatively little about the make-up of our fastest-growing businesses – specifically, the skills and qualities that enable them to leave the pack behind."

"Our research identifies three characteristics that are shared by many of the businesses posting the highest growth rates in Europe: collaboration and alliances with other companies, innovation, and a sense of purpose. Other businesses plotting a growth strategy for the years ahead would benefit from understanding what has enabled these 'pacesetters' to succeed," he said.

According to the new report, 82% of 'pacesetter' companies have acquired a minority stake in another business in the last three years, while 65% have entered into licensing or franchising arrangements, and 60% have embarked on an equity joint venture. 

In the next three years, 43% of Europe's fast-growth companies expect to be involved in an M&A deal, it said. The study found that around half of the pacesetter businesses that said they expect to do an M&A deal in that timeframe would be motivated to do so by a desire to increase their market share or to acquire intellectual property or new technology, while the potential to expand into new product lines or geographies was also referenced as drivers. 

More than half the survey respondents said that they believe that investing in and using technology effectively will be among the top three most important growth factors over the next three years. 

Tyreman said: "Traditionally, businesses needing to get beyond organic growth have looked towards M&A, but the options for collaboration and alliance are much wider today. They often provide a means to experiment with innovation and transformation without making irrevocable decisions. This is all about seizing the best opportunities in a very broad landscape – and doing so with scale and speed." 

Andrew McMillan, who also specialises in corporate law at Pinsent Masons, said: "An unprecedented number of fast-growth companies are engaging in minority investments and alliances, allowing them to gain exposure to a market without taking the full risk that would be incurred through a traditional acquisition. By engaging in partnerships and alliances, companies are able to access new technologies, new platforms and customers, and in some cases entrepreneurial management teams."

"This could be termed a 'try before you buy' approach to M&A that allows both parties to assess each other and decide whether to progress with a more permanent arrangement. This enables companies to be agile and move quickly to take advantage of opportunities as they arise. The business landscape is changing quickly, and this dictates that players within the market have to move faster if they want to be successful. This is the nature of M&A for Generation Z," he said.

MergerMarket selected 100 companies from each of the advanced manufacturing and technology, financial services, energy and infrastructure sectors to include in the study based on growth rate criteria. Of the businesses selected, 177 were private equity owned companies, 133 privately owned, and 90 publicly listed.

Growth rates were calculated based on turnover reported in accounts for the past three years and, to be eligible for inclusion, companies had to have shown growth in each of the previous two years. There was a minimum turnover threshold for inclusion based on the most recent set of accounts: €50 million for advanced manufacturing and technology, financial services and infrastructure. For energy, the threshold was €30 million.